Trader Talk

Fed Rate Cuts: Can They Help Financials?


Today's disappointing earnings commentary from regional bank giants Wells Fargo and KeyCorp drove many regional banks to new lows. Analysts note that many banks are facing slowing loan growth, weak deposit growth, and potentially higher losses on residential and (in some cases) commercial mortgages.

Investors are struggling to answer the question, how widespread is the credit deterioration (the potential for more losses on home mortgage, construction loans)? The answer--more than we thought a week ago.

Some argue that Fed rate cuts, which imply a steepening yield curve, will help regional banks. It should; according to CIBC, regional banks earn 60% of their revenues from spread lending (spread lending is borrowing short and lending long: giving you, say, 4% yield for your deposits and lending out at a higher rate, say 7%). But it will take a while for the cuts to have a real effect.

Another big question traders are grappling with: Citigroup announced that they are stopping buybacks until conditions improve; will others follow suit? Buybacks have been a major source of support for the stock market.

Questions?  Comments?